China’s Large SOEs Increasingly Matchmaking For Western Partners

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Op-Ed Commentary: Chris Devonshire-Ellis

CHANGCHUN, Apr. 21 – As my regular tour of Northeast China cities continues, it is becoming apparent that the benefits to a foreign investor of participating in joint ventures with China’s large state-owned enterprises is spinning off in ways that no one had imagined a few years ago.

Take the massive state-owned First Auto Works (FAW) for example. In the past, I have spent many hours negotiating with a variety of foreign auto manufacturers in FAW’s gigantic offices in Changchun, not least for a division of Fiat. These talks could be protracted and the China side often unfamiliar with Western accounting and financial modeling. In the early days of Sino-foreign JVs, FAW was the game in town – producing everything from cars, trucks, buses and coaches to auto parts and even trams and railway carriages. Cold frigid winter days and a reputation as a rust belt did not do Changchun’s image much good, neither did the sight of farmers wearing blue Mao jackets and trotting along the side streets on donkey and cart. Detroit seemed sophisticated by comparison.

Today, as the global axis of auto manufacturing has shifted away from the United States, Europe and Japan, it now revolves around FAW in Changchun. FAW have many joint ventures with foreign companies, the largest being FAW-Volkswagen, while their ventures with Toyota, Mazda, Thyssenkrupp, Johnson Controls, Bharat Forge and many others have over the past two decades built FAW up into a global auto behemoth and into one of China’s most well-known companies. The returns for these businesses have proven spectacular. Johnson Controls, for example, grew their sales from the Changchun JV with FAW by 48 percent last year, and are increasing their local headcount from its existing 3,000 to 3,800 by the year end. Johnson’s China business, which is heavily linked to FAW, is targeted at growing from its existing US$2 billion turnover to US$3 billion in the next 18 months. The company, which makes about 45 percent of everything you see in an automobile’s cockpit, is clearly booming. These are impressive statistics which are effectively keeping the Johnson Controls business alive and healthy while its U.S. parent has been dealing with the economic downturn. No China, and the future picture for the company would start to look very different.

But the benefits of partnering with a massive, industry conquering Chinese state-owned enterprise doesn’t just lie in the dual Chinese capabilities of cheap manufacturing and a rapidly emerging domestic market. While Johnson Controls have long sought to sell to Volkswagen, FAW just happen to have VW as a partner in another venture. The result? FAW acting as matchmaker and introducing Johnson to VW. That is the now emerging win-win-win scenario that has oft been discussed but until recently has been viewed with some skepticism. The fact that FAW are on the scene and are able now to make and manage such introductions is possibly what is keeping the bruised and battered U.S. and Japanese auto manufacturers sustainable right now.

As China’s JVs come of age, it is worth appraising the advantages that such relationships can bring. While the unlikely thought of a blue Mao suited middle-aged communist executive as matchmaker between billion dollar American and European multinationals may appear odd, the fact is occurring. And rather like those placards one sees parents parade in China’s parks promoting their single child’s merits, the same is essentially true of China’s state-owned enterprises. Looking for partners for their own subsidiaries, China’s businesses are starting to look far more attractive as a potential union than ever before, and the potential for a successful joint venture, aided by state-owned enterprise match making techniques, bodes well for foreign multinationals considering the China market.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and has been involved with the structuring of China joint ventures for the past 18 years. The firm also maintains a significant business advisory division with offices handling the negotiation and establishment of Sino-foreign joint ventures, led by a team of foreign and Chinese legal professionals. Please e-mail legal@dezshira.com if seeking joint venture negotiation or structuring advice.

Chris also contributes to India Briefing , Vietnam Briefing , Asia Briefing and 2point6billion

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